30 Jun 2011
Michael Browne, co-manager of the Martin Currie European Hedge Fund, expands on why he believes that the passing of the Greek vote is good news for equities:
Here comes the cash.
Today’s decision by Greek parliamentarians to approve the €78 billion austerity plan for the country should send a chunk of money towards equities and bonds – and let everyone breathe a sigh of relief.
Huge quantities of cash have been building up in short-term instruments over the past few weeks as insurance against the European debt crisis taking a turn for the worse. Banks and corporations have set aside assets to ensure that they have enough working capital to avoid a repeat of what happened after the collapse of Lehman Brothers in 2008.
Proof of this is in money-market rates. The overnight Eonia rata has been at about 84 basis points, a massive 41 basis points below the European Central Bank’s main refinancing rate (monthly rates have been closer to the benchmark interest rate). This shows that the supply of money into short-term instruments is dwarfing demand and allowing banks to pay next to nothing for holding these assets (and to collect a tidy sum in the interest differential).
With the vote passed, Greece is set to receive its aid package from the EU and IMF, which means that this episode of the European debt crisis is over. As a result, investors won’t be so concerned with quick access to their assets, and therefore longer-term investments, such as stocks, will benefit greatly as money migrates to them over during the next month.
It will also be worth watching the prices of credit-default swaps for Spain, Portugal and Italy, which should show how the market sees Greece’s debt-restructuring plan progressing. The most recent proposal is for 50% of the nation’s debt to be rolled over into a 5.5% 30-year bond with the interest rate also pegged to GDP growth. Another 20% will be invested in an EFSF bond that will be rated AAA.
We’ll also be looking out for progress on Greece’s privatisation programme, and we don’t rule out the possibility of some EU structural funds being made available to kick-start Greece’s economy. A positive resolution of these issues would give a further lift to equity markets.
Here comes the cash.
Today’s decision by Greek parliamentarians to approve the €78 billion austerity plan for the country should send a chunk of money towards equities and bonds – and let everyone breathe a sigh of relief.
Huge quantities of cash have been building up in short-term instruments over the past few weeks as insurance against the European debt crisis taking a turn for the worse. Banks and corporations have set aside assets to ensure that they have enough working capital to avoid a repeat of what happened after the collapse of Lehman Brothers in 2008.
Proof of this is in money-market rates. The overnight Eonia rata has been at about 84 basis points, a massive 41 basis points below the European Central Bank’s main refinancing rate (monthly rates have been closer to the benchmark interest rate). This shows that the supply of money into short-term instruments is dwarfing demand and allowing banks to pay next to nothing for holding these assets (and to collect a tidy sum in the interest differential).
With the vote passed, Greece is set to receive its aid package from the EU and IMF, which means that this episode of the European debt crisis is over. As a result, investors won’t be so concerned with quick access to their assets, and therefore longer-term investments, such as stocks, will benefit greatly as money migrates to them over during the next month.
It will also be worth watching the prices of credit-default swaps for Spain, Portugal and Italy, which should show how the market sees Greece’s debt-restructuring plan progressing. The most recent proposal is for 50% of the nation’s debt to be rolled over into a 5.5% 30-year bond with the interest rate also pegged to GDP growth. Another 20% will be invested in an EFSF bond that will be rated AAA.
We’ll also be looking out for progress on Greece’s privatisation programme, and we don’t rule out the possibility of some EU structural funds being made available to kick-start Greece’s economy. A positive resolution of these issues would give a further lift to equity markets.
